tv Book Discussion on Dealing with China CSPAN May 27, 2015 12:56am-1:37am EDT
at the time a homeowner sells his or her house at the time of closing whatever the net capital gain is, if it's $100 the lender gets 5% of that so $5 out of that capital gain in the initial investment the lender gets to keep five out of the $100. you do the math and it turns out just as 5% is sufficient to pay for the insurance that the lender is providing and basically that they would have been very regularly so the small upside is sufficient to make the lender holds for providing this insurance and so that will not change the upfront cost in terms of the interest rate up front. that will remain the same but now they are protected and the downside of the lending return gets a small piece of the upside which actually many of the market participants would be very happy to take because the
upside gives them a share of the house price growth that tends to typically bring people over time so they would get the dividend payments and the constant basis because six or 7% of households sell the house for the mobility and the job switches and so on so they will continue to get the 5% of the upside the most important elements of having this kind of a contract is in the event of a downturn like the one that we had in 2008 we will not have the amount of layoffs that we did. the gdp will not have to fall as steep as it did. the recessions will tend to not be as long as they typically are because when you look at historical recessions, the one variable that is the forecast recessions the best turns out to be private debt. there is very interesting work that has come out more recently
that looks at this long-term historical span of data and it uncovers this important fact that it's private debt in particular household debt tends to forecast deeper and longer recessions so we need to think about why that is the case and that is what the book is about and then when you think of the solutions, one has to have these mechanisms. that is the key to focus on. >> host: is it politically feasible? >> guest: while, it's practically feasible. let's put it that way. so, i talked about the requirements of the suggestion. i've personally spoken to people in the private sector. there is demand from the private sector for this type of contract. lenders in the capital industry for example, they are willing to
invest in this kind of a contract because it's kind of contract offers from certain attractive features i already mentioned it gives them exposure to house prices. they want to have an upside if you're a longtime pension fund holder it has certain characteristics so there is a demand on the lending side as well. we currently have some bias in the existing system push in the wrong direction senate creates hurdles to extend these kind of contracts. there are a few reasons for that. one of them is taxation so the way that the system is run today we subsidized debt because of the standard mortgage contract. that's one important force that
goes in the wrong direction because it's in the interest for the tax subsidiaries and then lenders as well to issue the standard event as opposed to. so we need to change the system of taxation. it's not about higher or lower taxes. you need to tax differently even if it is revenue neutral come it shouldn't be bias on the tax structure so that it promotes the creation of debt that has these negative consequences. similarly, when it comes to the way that we run the b. division for the banking sector it is in the interest of the banks that we have the system right now to hold the standard contract on the asset side because if it is standard event come it will be likely to be rated very high and has told the capital against it.
if they are issuing mortgages that have this insurance component the capital requirements will be much higher for the same so from the capital perspective to issue the kind of mortgages that will do better for the system as a whole when we talk about the provincial regulation that would promote stability in the macro economy and the financial system. we need to incorporate these feedbacks we talked about how the negative consequences of financial contracts the way we write and today. but currently the taxi and the story regime in the pico pushes them more so that's what we need to move away from. it is feasible that we need to change these taxation aspects.
one way to implement this is very straightforward for the case of the u.s. and allied me just quickly mention that and then i will say a few words on the political aspect of things. we already have a situation where just to keep on with the market example, we already have a situation where the mortgage market by and large is defined by the government through freddie and fannie so it's not like the government is out of the market as we have it. it is very much in it and it's in it from the taxation site as well as i talked about from the market interest. to change the situation, the government can judge the market to go in the right direction. so for example, there is a specific definition of what the market is and if the mortgage satisfies those characteristics,
it gets a certain backing from the government-sponsored entities. they provide insurance for the conforming mortgages. if the government changed the definition of what constitutes the conforming market ... okay you know, we will provide that backing a certain level the way we do it now but it is now defined differently and it's now the shared responsibility as i previously defined it. if that is the new conforming mortgage and somehow so now the government is pushing the private sector to move in that direction, which is a better direction from the macro stability perspective. the new mortgage will nudge the market to go in that direction and it will be revenue tool in the sense that you are not adding any new taxes and yet it will remove this bias that tends to promote this as opposed to
that which will automatically be adjusted for the changing macro environment so those are kind of some of the specific things that can be done. now for any or all of these things to happen of course certain executive decisions need to be made which involve congress and which involve the white house and so on. having talked to some of the political players there is an understanding that these things are important so we understand the logic of talked to congress people and so on the understand the logic into the agree that this is the direction that we should go and if we can move in this direction having said that we do live in a broad environment where things are very polarized. it's very difficult to pass anything it seems in washington
and that lowers the prospects of doing this successfully. our position is to argue the points on hopefully dick and push the debate further in the publicaffairs to continue the conversation with the political site as well as academic and public discourse more generally to help understand the situation and try to highlight that which is preventing the financial system from being a force for positive change all the time and then at the end of the day we have to leave it in the hands of the politicians and political parties to say this is what we think is better and in the public interest and at the end of the ball is in their court to make academic decisions. >> host: is home ownership is worthy goal? >> guest: it is a worthy goal
but it shouldn't be pushed in an unsustainable manner. so clearly i own a home and i enjoyed it. that's a decision i've made and i would hope the same for others as well as i hoped for myself. i think it's a worthy goal. what can but can become an issue is if you push homeownership in an unsustainable way or artificial manner without understanding the fundamentals are going in the opposite direction so i will give you one specific example. if you get the growth in home ownership prior to 2008 there was a substantial growth in home ownership up to five percentage points in the u.s.. the kind of people that were getting homes for the first time it would be wonderful if they were getting homeownership because their overall learning capacity was expanding and now they could afford a home. that wasn't the case.
if you look at the numbers people who are actually dying for the first time into these homes it's not that the incomes are rapidly expanding as we know the median incomes have been stagnant in the terms and that was true so despite the stagnation of the wages and in real terms, the households are now buying more expensive houses and leveling up more because they didn't have the savings for the incumbent to buy the entire house, so they were just being able to borrow more and more and that is the only reason that they were increasing. but that is not a sustainable situation. we saw that in 2008. the last set of people that bought a home for the first time they didn't have the financial capacity to pay the mortgage even for the first few months of living in that house and that is what triggered the downturn in the housing market so clearly the process was unsustainable. just as one number that we try to ramp up as much as we can
come of that cover that kind of policy can backfire. we need to look at the earning potential of the class that we are trying to push into the home ownership category. he is a professor in chicago who started working on these issues of housing mortgages and how all of that connects to the economy. they just started thinking of these in 2006 before the crisis and they started building the kind of data that he needs for the analysis that is inside this book. so i remember when it started to appear and in 2008 when the system kind of crashed, we were
already sort of had to set up the theater to look at the issues that became relevant so in one sense we were lucky that the crisis sort of fell into our laps so to speak but it's been just a tremendous opportunity to work with someone like him. >> host: house of death is the name of the book. professor of economics and public affairs is the co-author. you are watching book tv on c-span2.
and the beginning of june we are live for the printers row literary festival with our in-depth program with pulitzer prize winning author lawrence wright and/or phone calls. near the end of june watch for the road to these covers about reading festival from the library. in the middle of july we are the harlem book fair the flagship literary event with panel discussions and at the beginning of september we are live from the nation's capital for the book festivals bridging its 15th
year. that's a few of the events this summer on booktv. former treasury secretary henry paulson has written a book dealing with china about the negotiations of opening the trade. he talked about china and its transition to capitalism with the news correspondent. from the national press club in washington, d.c., this is 40 minutes. [applause] >> thank you all for being here and being patient. the president scheduled a news conference and i was anchoring the coverage so i jumped in the car and i raced here as soon as i could. i was speaking about something very relevant to what you have worked so hard on.
we put the country on a footing for the future, this country and the world, so i just wanted to say that it's a privilege for me to be here with someone who is writing about his perspective as a policymaker with his long experience in china but actually had more than 100 visits going back years and years as the ceo of goldman who brings the perspective together as we assess our greatest economic rival. secretary paulson thank you for being here it is a privilege.
>> it's my pleasure to be interviewed by you because i've admired the job you've done for a long time and i think you all for being here but i'm looking forward to the conversation. >> dealing with china is a fascinating insight. the president did just now at his news conference tried to explain the transpacific partnership, the trade, the fasttrack that he has run with divided democratic support and opposition from the incoming democratic minority leader chuck schumer. as for the democratic party is divided into this will clearly be a big election-year issue. he was trying to make the argument fast-track authority is first of all not anything other than what has been granted every president except richard nixon and the ultimate appeal is to be negotiated and that this transpacific partnership which is so important to the role in
asia has unique human rights and labor protections which previous deals have not had and if we don't buy into it we will be left in the dust and china will just run circles around us if they are not already. so your perspective on that. >> first of all the president is right that trade promotion authority i think it's essential to get a trade deal done. we won't be able to negotiate the best possible deal or negotiate any deal at all if the president doesn't have that because otherwise how will the other side know that it was a real negotiations of all this does is put us in the position to negotiate a deal number one and it's essential. second, i think the transpacific partnership is extraordinarily
important for a number of reasons. it's important to our credibility in our national security or economic security because this administration has made this a huge priority. if we say if we are going to do something it's important that we do it number one. secondly as the president even needed to china is very active on the economic front, therefore the economic linkages are benefiting china into the world, but throughout asia in those economic linkages, trade and investment they believe it helps their economic and national security influence, so then i take it a step further and the reason this is important is i
think the national security starts with economic security and i don't think that china as we will talk about later is a formidable competitor and we want the competition to be healthy and we shouldn't shrink from the competition. it's something we should welcome. lastly about the trade deals trade people today to trade. there are negatives and positives but the negatives that it could positives far outweigh the negatives. how do we continue to be successful with 4% of the the worlds population we don't go out and attempt to do as much business as possible with the other 96. you can't put a wall around and be successful but what i argue which to me is a no-brainer even those that disagree with me on trade generally who i think are wrong should want a deal like this because the markets are already open. we already have the trade and
globalization. this gives greater access to other markets and it's a special deal because it's focused on asia and it's important we continue to be strong economically, diplomatically and militarily. >> how would you grade this administration in terms of its ticket to asia. some feel it was more talk than action. >> this has been the policy for a long time. in asia i forget if it's the 49th or the 50th state about we have a state and the pacific. we have been a major asia power for a long time. the whole region has benefited from our presence, the security blanket. it has provided and you take a look at the huge economic benefit that this has provided
for china and everyone else, so i think that is important and i think reemphasizing or putting more emphasis on asia is very important. a two step to step back even further because this book is about dealing with china and i wrote it because this is such an important bilateral relationship and i think that every major global issue or at least most of them will be easier to solve if we are working in a complementary way with china, more difficult if we are not. this relationship is becoming more complex and difficult because they are increasingly a competitor so it's important in the areas that we have a shared interest whether they are claiming to change and i bring that up because the administration has done a good job in the historical agreement and we can't begin to solve this
problem unless china is a big part of it and they are the biggest emitter of carbon emissions and the fact that the u.s. working with china is very important and the upcoming summit. so i think the issue is one that a lot of people have talked about. there is a tendency to go from crisis to crisis and if we spend more time spent more time on the u.s. china relationship and got that better some would-be easier to solve. the other thing that would make the relationship stronger is if the u.s. continues to strengthen its economic situation. the chinese respect strength.
i think the biggest challenge which i would say over and over again to the u.s. continue to predominate globally and a very strong position in asia it is our ability to fix our own economic situation and financial situation. china has tremendous challenges and issues more than we do. they need to reboot their whole economy. so you can make as big a mistake as he came out overestimating it so that's putting it i think in perspective, and i think the administration has done a job that is very comparable to the policy similar to that we've had for some time. i think we need to recalibrate
now. this is a different china and i think it is going to be more difficult to get an important things done but it's more important to get those done. >> one of the things that is revealing in the book is to know these leaders and you've seen them in previous stages and so the personality portrayals of the other leaders including the current president are so fascinating. as uss their ability to handle the comedy of the economic reform challenges, that perception challenges and the other things they face. i want to drill down as the first to know one of the most interesting economic thinkers in chinese history, recent chinese history tell me about your relationship and why you think he was such a pivotal character. >> that is a great question
because the first chapter in the first scene was meeting him and the reason i have so much respect for him is that he was a pioneer in terms of driving reforms and they are never easy and he made some really difficult and tough decisions and he was a tough thinker and there is great resistance to change. the first story that i tell is about the china telecom. it's the first major restructuring that china did and i said when we worked with
them this had taken six to eight years andr a while to decide what they want to do but this was done in six months and it was extraordinary that it was a vehicle. i told a story about how these transactions fit into the bigger picture and he used them to drive reform in china and open up to more competition just like he used the succession. >> it reminds me of my first trip to china in 1984. he was still talking and going into the trip. by the time he came out after a stop in shanghai meeting with university students, we have
several days of stopping in alaska in fairbanks he had a news conference and the great anti-communist started talking about the so-called capitalists. he was seeing a different side of china which brings me to you have seen this evolution many times now. clearly it's what they want to do in the international markets yet they still feel the government itself according to every official i talked to is still stealing intellectual property targeting us with cyber attacks. how do you reconcile facts
>> let's understand that china is and isn't because the current president is very direct and he makes no mistake about communicating his view and that is they don't aspire to be a western-style democracy, they don't aspire to have western values, he refers to the communist party also time as the source of stability so at the same time remember he has inherited the reform. so he has inherited a whole lot of issues in the economy that needs to be rebooted with an organization model, there is corruption huge environmental
problems. they need to change and modernize the government. so he's got all these challenges and he's talking about economic stability. it's tight in the political system the media, the internet and to us that seems to be a paradox. how can you do that at the same time? to him it makes sense because it is a source of stability. i look at it and i say this can't be the road to success long-term because how do you do all the things they need to do in building the kind of companies to compete in the global system and having the
private sector do as well as they want to do innovating if you don't open yourself up to the competition of ideas and how -- i ran a company for a number of years. i don't know if you are not totally connected. you mentioned cybersecurity and just to say a few words about that i spent a lot of time on that in the buck and a number of things completed the cyber area. the country whether it big it is destabilizing. then there's cyber espionage and that's something the chinese do too aggressively, we do it aggressively and other major
companies, so there is finger-pointing but y'all do it. then you deal with the internet and censorship, that's an issue. there's cyber in terms of procurement of technology which gets into the national security area. there are certain systems we won't buy from china because we want to protect ours. then the last issue which is cyber theft of intellectual property and i would say in dealing with china i think that this is the most divisive dangerously destabilizing economic issue because it gets at the theaters that china doesn't play fair. it's hard to make an economic system work with and their are not easy answers. i basically make two points.
first we need to do a better job of protecting our systems and second, i think in addition to continue to really push the chinese hard we need a multilateral approach where we work with other nations to design the rules of the road and enforcement mechanisms and that has been made more difficult because some of these other issues have all been completed and after it's hard for the u.s. to have the high ground. but i would argue that the cyber theft of intellectual property is a different issue and it is one that should be much easier to have the high ground and we need to figure out how to work with other nations on. >> my point would be the one the white house makes at least on intellectual property, on the theft of trade secrets whatever they do it from their own government, from the military.
when we do it, it's not the u.s. government per se. >> i don't think we take intellectual property. there is no evidence of her either by the u.s. company or the government of breaking into computers for taking intellectual property. .. companies are. >> it's a problem and its unique and it's different from the espionage and the others. and i agree with the government on that.
>> we would like to bring the guests in the audience in. wait for the microphone for a moment. there we go. >> good afternoon. i have been teaching in china and i have a son working for quite some time. you have eluded to your relationship and now can you expand a little bit and compare the reform climate is. >> as a result the bureaucracy
has become paralyzed. nobody wants to make the decisions. can you discuss that? >> i would say first of all people underestimate the difficulty of getting things done and the decisions he had to make. i write about this in several chat verse with the first deal where you are laying off hundreds of thousands of people. we describe in the book what it looked like as a medieval village. they have their own stores hospitals schools. dealing with a dot was difficult. this job may be even more difficult and because reform
stalled when you have a certain amount of success and they had a lot of success, it's hard to get people to change and he's looking to change. i don't think that any leaders in the history of the world have ever tried to change so much on such a massive scale. so it's one thing to talk about rebooting a 10 trillion-dollar economy but if you are relying on the municipal finance to invest in infrastructure that's not going to work because it's built up so much to come up with a different model and tax system and they are working hard on that. yet he is looking to redo the system to deal with the property
rights issues people are so unhappy about and now let's talk about the corruption campaign. this is the most extraordinary thing i have witnessed because it extends to every part of the society. they've already punished over a quarter million people in of a million people in over 70 of the minister level and it seems to be intensifying and this is driving i think first and foremost because corruption is such a huge problem and he beliefs the party won't survive and it's very much an issue on the people's mind and second, there are divisions on the number of these issues, there is not a consensus. people think because it is an authoritarian government that someone at the top can make in order and an order and that they will all get done.
but it's going to take getting a lot of things done but the more difficult things it's going to take years to get people in the important positions and i think a secondary purpose of this campaign is because he's concentrating more power quickly than any leader i can think of. but it's going to take more to get people in these positions so the campaign also by striking sections of the economy and the vested interest as a tool in the toolkit to get some of these things done but this is when he was driving reforms it was in the economic area and i think